The bank starts with $600 in bank capital. It then accepts $9,400 in deposits. The reserve requirement is 18%, and the bank decides to keep an extra 7% of deposits as excess reserves. The bank uses the rest of the assets to provide loans. a) Show the balance sheet of the bank. Find the leverage ratio. b) Suppose the bank's largest depositor withdraws $1,400. The bank decides to restore its reserve ratio by reducing the amount of loans. Show the new balance sheet of the bank. Find the new leverage ratio. c) Why might it be difficult for the bank to take this action? Describe another way the bank can return to its original reserve ratio. d) Following the events of part (b), the borrowers defaulted on 5% of loans from the bank. So, these loans become worthless, and bank capital is used to adjust for this event. Show the new balance sheet of the bank. Find the new leverage ratio.

The bank starts with $600 in bank capital. It then accepts $9,400 in deposits. The reserve requirement is 18%, and the bank decides to keep an extra 7% of deposits as excess reserves. The bank uses the rest of the assets to provide loans. a) Show the balance sheet of the bank. Find the leverage ratio. b) Suppose the bank's largest depositor withdraws $1,400. The bank decides to restore its reserve ratio by reducing the amount of loans. Show the new balance sheet of the bank. Find the new leverage ratio. c) Why might it be difficult for the bank to take this action? Describe another way the bank can return to its original reserve ratio. d) Following the events of part (b), the borrowers defaulted on 5% of loans from the bank. So, these loans become worthless, and bank capital is used to adjust for this event. Show the new balance sheet of the bank. Find the new leverage ratio.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Suppose a commercial bank has checkable deposits of $60,000 and the legal reserve ratio is 25 percent. If the bank's required and excess reserves are equal, then its actual reserves Multiple Choice are $1,500,000. cannot be determined from the given information. are $30,000. are $15,000.
Assume the Required Reserve Ratio is 20% for all the banks. If the Federal Reserve sells $500,000 worth of US Treasury Bonds to the banking system (these three banks) who pay for the bonds with Reserves (Cash), what impact will this transaction have on the loan creating potential of the banking system?
Consider the following scenario for a bank. It has $200 in reserves, $800 in loans, $400 in securities, $1200 in deposits, and $100 in debt. a) Calculate the bank's capital. b) Calculate the bank's leverage ratio. c) Suppose there is a stock market boom, so that the bank's assets increase by 2 percent. What is the percentage change in the bank's capital? What is the change in the bank's capital in dollars? d) Suppose that, instead of stock market boom, some borrowers default on their debt so that the bank's assets decrease by 2 percent. How much is now the bank's capital?
Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 10%. Eric, a Southeast Mutual Bank customer, deposits $250,000 into his checking account at the local branch. Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans). Assets Liabilities Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%. Hint: If the change is negative, be sure to enter the value as negative number. Amount Deposited Change in Excess Reserves Change in Required Reserves (Dollars) (Dollars) (Dollars) 250,000 Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Cho, who immediately uses the funds to write a check to Bob. Bob deposits the funds immediately into his checking…
Consider the following T-account for National City Bank: Assets Reserves $10,000 Loans $90,000 A) $10,000 If the required reserve ratio is lowered to 8 percent, how much can National City loan out? B) $8,000 C) $2,000 Liabilities D) $0 Deposits $100,000
Suppose the bank decides to invest 45 percent of its excess reserves in short-term securities in order to earn interest. The bank issues a cashier's check to a securities dealer to purchase the securities. The securities dealer deposits the check into an account at a different bank. What will ACME Bank's balance sheet look like after the check has been processed? Fill in the values in the table below. Assume a required reserve ratio of 10 percent. The balance sheet for ACME Bank is shown below.
Initially, the banking system has a required reserve ratio of 20.0 percent, $450,000 in total deposits, and no excess reserves. If the Fed reduces the required reserve ratio to 15.0, how much unused lending capacity does the banking system now have? Multiple Choice $750,000 $3,000,000 $337,500 $150,000
The commercial banking system has excess reserves of $4,000. Then new loans of $30,000 are subsequently made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be _%. Your Answer: Answer
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 4 percent, then the bank can make a maximum loan of
Suppose banks hold no excess reserves, and R = 10%. Further assume that you receive a check for $9,000, which you deposit at your bank. It follows that your bank will be able to lend out $8,100. Don't copy paste answer please your bank’s assets and liabilities both increase by $9,000. None of the answers are correct. All of the answers are correct. your bank’s required reserves increase by $900.
11
The initial condition of the banking system is as follows: $500 billion in reserve, $4,500 billion in loans and investments, and 5,000 billion in deposits. The required reserve is 10%. The Fed buys $100 billion government securities using open market operation, and lowers the reserve requirement to 5%. The banking system converts 85% excess reserves to loans, but borrowers return only 65% of these funds to the banking system as deposits. What is the maximum amount of loans in the banking system as a result of such Fed operation?